Securitisation in CEE awaits the great leap forward

By bne IntelliNewsMay 12, 2008

Robert Smyth in Budapest -

After almost grinding to a halt in 2007, the only way is up for the securitisation market in Central and Eastern Europe.

"There's huge potential and good assets in CEE, but the market appetite has decreased. I expect the market to return to a certain level later this year," Andras Zilahy, head of securitisation at Raiffeisen Group, told delegates at Information Management Network's (IMN) conference on securitization in CEE in Budapest in April. "This is a good time to build up a portfolio."

While there is very little publicized securitisation activity in CEE at the moment, Zilahy said players are working behind the scenes. "The over-complicated nature of securitization deals due to the lack of a historical data set has been holding securitisation back, but the good news is that transactions are becoming straightforward," he said.

After only three deals in CEE in 2006, two from Raiffeisen International (Roof) and one in Czech Republic (Home Credit), last year saw just one transaction, a PLN100m covered bond issuance in Poland. But Central Europe should bring more deals to market in 2008 given the positive changes to the law in various countries and the pipeline of projects, Tycjan Bielecki, assistant vice president at Moody's Investors Service, said in a recent report on securitisation in Europe, Middle East and Africa (EMEA). "The ultimate effect of the credit crisis will naturally depend on its duration, as well as the willingness of investors to regain confidence in securitisation in general, and in new markets in particular," said Bielecki.

Moody's expects Russia to maintain its lead in the region due to the many deals postponed from 2007, increasing asset class diversification and growing interest from second-tier banks, while Turkey's volumes and activities are also likely to grow. "The global credit crunch has proven to be a test for new securitisation markets of EMEA from both growth and performance perspective," said Bielecki.

Moody's noted that the reduced EMEA volume of 23% compared with 2006 was largely a result of constrained second-half issuance as the credit crisis struck. Moody's also said the CIS region continued to dominate issuance volume, representing 45.4% of the total volume. Turkey and the Middle East also accounted for significant shares of 31.4% and 16.5%, respectively.

Safe havens

The very fact that economic circumstances are challenging could lead to a surge in demand in CEE, as there will be more need for structured deals. "There's structured demand and a lack of capital in the region that the market needs to answer. Lots of banks are foreign owned and are struggling for market share and it's a question of price," said IstvÃ¡n Lengyel, secretary-general of the Banking Association of Central and Eastern Europe.

Lengyel said the slowdown in lending growth, except in Romania and Bulgaria, is twinned by worsening asset quality. "Liquidity is becoming more of an issue. Economic growth is more than acceptable, but parent banks are important in financing banks and central banks are also stepping in." He added that Kazakstan also has invested money from oil and that state funds are quite active. Kazakhstan has seen mortgages and future flows deals, while a few mortgage transactions have also come out of Ukraine.

Andrey Krysin, president of the European Trust Bank, also told the IMN conference that Russia is "a safe haven in a sea of crisis" and expressed hope for the development of Russian regulation. "2007 saw a record high in direct foreign investment flows making Russia world's seventh largest and we expect a flow of foreign banks."

While Russia still dominates the market with $3.5bn issued in 2006, based upon car loans, consumer loans, RMBS (Residential Mortgage-Backed Security) and future flow, 2007 saw a decline to just over $2.5bn.

Employment figures in Russia are good, which is a key factor in loan performance, asserted Andrey Milyutin, project manager at IFC Primary Mortgage Market Development Project. However, he described collateral performance as "strange" in Russia, with the Moscow mortgage collateral market dropping 15% from January 2007 to January 2008. "It's a good outlook from a macro performance point of view, but collateral performance needs to be reviewed," Milyutin said, stressing that the US is the driving force behind liquidity issues. "Macro performance in the US is key. The moment the press says the US is in recession, the overall situation could worsen. If there's a psychological improvement, investor trust could reappear. It could swing either way rapidly."

He even suggested that Russia could play a role in rescuing western sentiment. "Eastern money is rescuing western money. Russia has a big state fund placed abroad, and is purchasing international instruments. Money does indirectly support international financial institutions."

Could this be the first time the East bails the West out of a financial crisis?

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